china and global economy

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213

1. Introduction

It is a great pleasure to be here with you today to discuss the role of Asia in the

post-crisis global economythat is, to the extent that the global economy istruly post-crisis. My focus will be on my home countryChina is obviously the

biggest story out of Asia in terms of economic growth in recent decades, and the

growth in China has been a driving force for the recovery from the global crisis

since 2009. As a Chinese economist and specialist on economic development, I

have had the good fortune to witness and participate in the policy debate over

this remarkable period since returning to China with a PhD in economics in 1987.

I will organize my remarks around the following four themes: (i) Chinas

achievements since the initiation of economic reforms in 1979; (ii) prospectsfor Chinas growth in the coming decades; (iii) challenges for Chinas future

growth; and (iv) the role of China in the multipolar growth world.

2. Chinas Achievements since the Reform and Opening in 1979

China started its reform and opening in 1979 and achieved an annual growth

rate of 9 percent between 1979 and 1990. At the end of that period and even up

to early 2000s, many scholars still believed that China could not continue thatgrowth rate much longer due to the lack of fundamental reforms.1However,

Chinas annual growth rate during the period 19902010 increased to 10.4 per-

cent. On the global economic scene, Chinas growth since the reform and open-

ing started has been unprecedented. This was a dramatic contrast with the

depressing performance of other transitional economies in Eastern Europe and

the former Soviet Union.

As a result of the extraordinary performance, there has been a dramatic

change in Chinas status in the global economy. When China embarked on itseconomic reform program in 1979, the worlds most populous country barely

registered on the global economic scale, commanding a mere 1.8 percent of

L U N C H E O N ADDR E SS

China and the Global Economy

Justin Yifu Lin

Authors note:I am grateful for David Rosenblatts help in preparing the paper.


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214 ASIA ECONOMIC POLICY CONFERENCE ASIAS ROLE IN THE POST-CRISIS GLOBAL ECONOMY

global gross domestic product (GDP) (measured in current U.S. dollars). Today,

it is the worlds second-largest economy and produces 9.3 percent of global GDP

(Figure 1).

Chinas exports grew by 16 percent per year from 1979 to 2009. At the start

of that period, Chinas exports represented a mere 0.8 percent of global exports

of goods and nonfactor services. Now China is the largest exporter of goods in

the world, with 9.6 percent of the global share and an 8.4 percent share of goods

and nonfactor services (Figure 2).

In 1980, China was still a low-income country; in fact, its income per capita

(measured in purchasing power parity or PPP) was only 30 percent of the level

of the average sub-Saharan African country.2

Today, its income per capita of

F I G U R E 1Chinas Share of World GDP

(share measured in current USD)

Source:World Development Indicators.

Percent

10

9

8

7

6

5

4

3

2

1

01979 2010

F I G U R E 2Chinas Place in the World as an Exporter


A Chinas Share of World Exports of Goods andNonfactor Services (share measured in current USD)

Percent

9

8

7

6

5

4

3

2

1

01979 2009

B Merchandise Exports, 2009(in trillions of USD)

China 1.20

Germany 1.13

United States 1.06

Japan 0.58


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LIN | CHINA AND THE GLOBAL ECONOMY 215

$7,500 (in terms of PPP; $4,400 in current dollars) is over three times the level

of sub-Saharan Africa, and China is well-established as a middle-income coun-

try (Figure 3).

Behind this growth, there has been a dramatic structural transformation

in particular, rapid urbanization and industrialization. At the start of economic

reforms in the 1980s, China was primarily an agrarian economy. Even in 1990,

73.6 percent of its population still lived in rural areas, and primary products

composed 27.1 percent of GDP. These shares declined to 27.1 percent for the

rural population and 11.3 percent for primary products composition of GDP in

2009. A similar change occurred in the composition of Chinas exports. In 1984,

primary products and chemicals composed an important share of merchandiseexports (about 55 percent). Now, almost all of Chinas exports are manufactures

(Figure 4).

Accompanying the change in the composition of Chinas exports is the accu-

mulation of foreign reserves. In 1990, Chinas foreign reserves were $11.1 bil-

lion USD, barely enough to cover 2.5 months of imports, and its reserves today

exceed $3 trillion USDthe largest in the world.

Globally, Chinas economic performance was outstanding during the East

Asian financial crisis (1998) and the current global crisis (2008) (Figure 5).China withstood the shocks and maintained dynamic growth in both crises.

Chinas decision to maintain the renminbis stability helped other East Asian

economies avoid a competitive devaluation, which contributed tremendously to

the quick recovery of the crisis-affected countries. Chinas dynamic growth in

the current global crisis has been a driving force for the global recovery.

F I G U R E 3

Ratio of Chinas GDP per CapitaRelative to Sub-Saharan Africa

(ratio measured in current

PPP-adjusted dollars)


4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

01980 2010


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The reasons for China experiencing such remarkable growth over the past

30 years were

1 China adopted a dual-track approach and was able to achieve stability

and dynamic transformation simultaneously.

F I G U R E 4The Structural Transformation of Chinas Exportsa

aData are not available prior to 1984 for this classification.

Source:WITS database.

A 1984 Structure of Chinese Exports

MiscellaneousManufactured

Articles; 18.0%

Machinery and Transport Equipment; 5.7%

Manufactured GoodsClassified Chieflyby Material; 19.3%

Chemicals; 5.2%

Animal and Vegetable Oils and Fats; 0.6%

Mineral Fuels, Lubricants, andRelated Materials; 23.0% Crude

Materials,Inedible,

exceptFuels; 9.2% Beverages and Tobacco; 0.4%

Food andLive Animals; 12.4%

Unclassified; 6.1%

B 2009 Structure of Chinese Exports

MiscellaneousManufactured Articles; 26.8%

Machinery andTransport Equipment; 47.3%

Manufactured GoodsClassified Chieflyby Material; 15.4%

Chemicals;5.1%

Animal and Vegetable Oils and Fats; 0.0%

Mineral Fuels, Lubricants, and Related Materials; 1.7%

Crude Materials, Inedible, except Fuels; 0.7%

Beverages and Tobacco; 0.1%

Food and Live Animals; 2.7%

Unclassified; 0.1%


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F I G U R E 5China Glides Past Regional and Global Financial Crises


A GDP Growth during the Asian Crisis

Percent

1997 1998 1999 2000 2001

10

8

6

4

2

0

2

China

East Asia & Pacific

B GDP Growth during the Global Crisis

Percent

2005 2006 2007 2008 2009 2010

16

14

12

10

8

6

4

1

0

2

4

China

World

2China was a latecomer, developed according to its comparative advan-

tage, and tapped into the potential advantage of backwardness.3

Many authors, myself included, have written extensively about the Chinese

governments pragmatic approach to reforms. The result was to achieve tran-

sition without tears. This was no accident: It was based on the governments

recognition that big-bang reforms could be self-defeating. It was necessary to

let private enterprises prosper wherever feasible, but to continue to support

important state-owned enterprises while reforming them gradually.

The second point is the latecomer advantage, as I wrote in my article Chi-

nas Miracle Demystified:4

A developing country such as China, which started its moderniza-

tion drive in 1949, potentially has the advantage of backwardness in

its pursuit of technological innovation and structural transforma-

tion (Gerschenkron 1962). In advanced high-income countries techno-

logical innovation and industrial upgrading require costly and risky

investments in research and development, because their vanguard

technologies and industries are located on the global frontier. Moreover,the institutional innovation required to accommodate the potential of

new technology and industry often proceeds in a costly trial-and-error,

path-dependent, evolutionary process (Fei and Ranis 1997). By con-

trast, a latecomer country aspiring to be at the global technological and

industrial frontiers can borrow technology, industry, and institutions


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from the advanced countries at low risk and costs. So if a developing

country knows how to tap into the advantage of backwardness in tech-

nology, industry, and social and economic institutions, it can grow at

an annual rate several times that of high-income countries for decades

before closing its income gap with those countries.

3. Prospects for Chinas Growth in the Coming 20 Years

Looking forward, China can still rely on the advantage of backwardness, and

it has the potential to maintain dynamic growth for another 20 years or more

because of the following reasons:

1 In 2008, Chinas per capita income was 21 percent of U.S. per capitaincome measured in PPP.5The income gap between China and the United

States indicates that there is still a large technological gap between China

and industrialized countries. China can continue to enjoy the advantage

of backwardness before closing up the gap.

2Maddisons (2010) estimation shows that Chinas current relative status

to the United States is similar to that of Japans in 1951, Koreas in 1977,

and Taiwans in 1975. The annual growth rate of GDP grew 9.2 percent

in Japan between 1951 and 1971, 7.6 percent in Korea between 1977 and1997, and 8.3 percent in Taiwan between 1975 and 1995. Chinas develop-

ment strategy after the reform in 1979 is similar to that of Japan, Korea,

and Taiwan. China has the potential to achieve another 20 years of 8 per-

cent growth. By that time, Chinas per capita income measured in PPP

may reach about 50 percent of U.S. per capita income. (Note that Japans

per capita measured in PPP was 65.6 percent of that of the United States

in 1971, Koreas was 50.2 percent in 1997, and Taiwans was 54.2 percent

in 1995.) Measured by PPP, Chinas economic size may then be twice aslarge as that of the United States; and measured by market exchange

rates, China may be at least the same size as the United States.

That said, now China is becoming an innovator in its own right. As a middle-

income country, in ma ny sectors that China has comparative advantage, other

higher-income countries have graduated, or are close to graduating, from those

sectorsfor example, household electronics and the high-speed train. If China

wants to maintain leadership in those sectors, it will need to develop the tech-nology/product innovation when it reaches the frontier. China can then become

a global technological/industrial leader in those sectors. There are also some

new sectors, such as green technology, which are important for Chinas sus-

tainable growth. China has the potential to be a leader due to its large domes-

tic market.


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4. Challenges of Chinas Growth in the Twelfth Five-Year Plan

The Global Crisis and the New Normal

Over the last three years, the global economy has witnessed its most tumultuous

times since the Great Depression. The impressive coordinated policy response

of the G-20 nations has helped the world avoid the worst possible scenario. Eco-

nomic activity started to recover around the world in 2009. Global GDP per-

formance improved from a contraction of 2 percent in 2009 to a growth of 4.2

percent in 2010, and a projected growth of 2.7 percent in 2011.6

However, we are observing a two-speed recovery. On the one hand, high-

income countries growth rates in 2010 and 2011 are estimated 3.1 percentand only 1.6 percent, respectivelyfar below the historical average following

other crises. On the other hand, developing countries have been growing at 7.6

percent in 2010 and are likely to be at 6.0 percent in 2011, much faster than

advanced countries and returning to their pre-crisis rates (Figure 6). Devel-

oping countries, especially China and India, but others too, have increasingly

become engines of the world economy growth.

However, there are tremendous risks underneath this global outlook. First

and most importantly, the high-income countries are still beset with high

F I G U R E 6The Two-Speed Economic Recovery

GDP Growth

Sources:WDI and World Bank Development Prospects Group Forecasts.

Percent

10

8

6

4

2

0

2

4

62005 2006 2007 2008 2009 2010 2011 2012

Developing Countries

High-income Countries

Forecast


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unemployment rates and large excess capacities in housing and manufactur-

ing sectors, which repress private consumption and investment and dampen

growth. The combination of low returns and high risks on financial investment

in these countries, caused by low growth and high unemployment rates, has

been referred to as the new normal (Clarida 2010).

Second, the sovereign debts in a number of European countries and the

government debts in some states in the United States may require restructur-

ing, and they present a threat to the stability of global financial markets.

Third, the large short-term capital inflows to a number of middle-income

countries creates appreciation pressures, and may damage their external com-

petitiveness and stymie their growth prospects. The capital influx may alsolead to the emergence of unsustainable bubbles in their equity and real estate

markets.

Fourth, the resurgence in food, commodity, and fuel prices has hurt the

poor and threatened social stability, as demonstrated by events in North Africa.

These risks to a sustained recovery are directly or indirectly related to the

simultaneous existence of large excess capacity in the high-income countries. In

spite of the recovery, industrial production in these countries is estimated to be

more than 10 percent below its peak in 2008 (World Bank 2011, p. 36). The highunemployment rate is a reflection of their high underutilization of capacity. The

need to increase social spending and provide stimulus to counter these condi-

tions at the same time that public revenue is under stress presents a dilemma.

Fiscal deterioration is a looming concern and has led to state and sovereign debt

problems in the United States and several European countries. The adoption

of low-interest rates in high-income countries as a countercyclical measure at

the same time that investment opportunities are constrained by the underuti-

lization of capacity encourages investors to seek high yields, resulting in largeshort-term capital outflows to emerging markets and contributing to the spikes

of food, fuel, and commodity prices.

The Challenge of Triple Imbalances

Given the inevitable slowdown in exports to high-income countries in the coming

years and the need to reduce trade surplus, it is prudent and pragmatic to con-

sider ways to rebalance the Chinese economy towards domestic demand. Muchis said about stimulating consumption, but the process should be balanced

between consumption and continuing strong growth in investment. The latter is

critical for industrial upgrading and sustainable increases of per capita income,

as well as developing green economy sectors and investing in environmental

protection. This shift towards domestic demand represents the first rebalancing.


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A second form of rebalancing is a structural transformation to reduce income

disparities. In spite of the general improvement of living standards, China has

shifted from a relatively egalitarian society at the beginning of reforms in 1979

to a country with alarming income inequality. The Gini index reached 41.5 in

2005, approaching the level of Latin American countries (World Bank 2011,

p. 94). The widening disparity may threaten social stability and hinder eco-

nomic growth.

There is a third form of rebalancing that is overlooked by macroeconomists.

Chinas extraordinary growth has come with almost inevitable environmental

costs. China needs to rebalance short-term growth and long-term environmen-

tal sustainability. This poses a challenge for the future in terms of shifting thestructure of production towards cleaner technologies.

The question then becomes: How can China engineer this triple rebalancing?

Rebalancing toward Domestic Demand and Reducing Income Disparities

The first two rebalancing themes are closely related in the case of China,

since in the end improving the distribution of income is the key to rebalancing

towards domestic demand (see Lin, Dinh, and Im 2010). Specifically, I am refer-

ring to the distribution of income between aggregate households on aggregateand the corporate sector (essentially the functional distribution of income) and

the distribution of income across households (or the size distribution of income).

We know from the national accounts and from industry data that a large share

of Chinese national income accrues to large corporations, and we also know that

an increasing share of income accrues to rich people. Both groups have higher

propensities to save than the middle-income and low-income households. Figure

7 displays the increasing share of corporate savings as a share of GDP and the

rising Gini coefficient that summarizes the increasing concentration of house-hold income. This pattern of income distribution increases investment and the

accumulation of productive capacity while repressing domestic consumption,

leading to a large current account surplus. Shifting more income towards work-

ers can rebalance income between rich and poor and between the corporate sec-

tor and households. This redistribution would also reduce external imbalances.

After the economic reforms in 1979, Chinas economic development changed

from a capital-intensive industry-oriented strategy, which went against Chi-nas comparative advantage, to a strategy that follows Chinas comparative

advantage. In theory, as noted in my Marshall Lectures, following comparative

advantage to develop industries should lead to improvements in the distribution

of income. More specifically, I have noted, when an economys development is in

its early stagewith relatively abundant labor and scarce capitalenterprises


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will initially enter labor-intensive industries and adopt more labor-intensive

technologies. This will create as many employment opportunities as possibleand transfer labor from traditional sectors to modern manufacturing and ser-

vice sectors. Accompanied with the upgrading in the endowment structure,

labor abundance will be replaced gradually with labor scarcity and capital scar-

city will gradually become capital abundance. Accordingly, the cost of labor will

increase and the cost of capital will decrease. Because capital income is the

major source of income for the rich, while labor is the major source of income

for the poor, such changes in relative prices will make it possible to achieve eco-

nomic growth and equity simultaneously (Lin 2009, p. 47).In practice, however, the concentration of income in the corporate sector

and among rich people is a consequence of the dual-track reform process, which

retains certain distortions as a way to provide continuous support to nonviable

firms in the priority industries. Those distortions favor large corporations and

rich people. Major remaining distortions include the concentration of financial

services in the four large state-owned banks, the almost zero royalty on natural

resources, and the monopoly of major service industries, including telecommu-nications, power, and banking.

Those distortions contribute to the stability in Chinas transition process.

They also contribute to the rising income disparity and other imbalances in the

economy. This is because only big companies and rich people have access to

credit services provided by the big banks, and the interest rates are artificially

F I G U R E 7Distribution of Income in China

Source: Panel A:China Statistical Yearbook, 19982009; panel B:Reprinted from Journal of Development Eco-nomics82(1), Ravallion and Chen Chinas (Uneven) Progress Against Poverty, pp. 142. 2007, with permis-sion from Elsevier.

A Corporate, Government, and Household Savings

to GDP, 19952006Percent

60

50

40

30

20

10

01 99 5 1 99 6 1 99 7 1 99 8 1 99 9 2 00 0 2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6

Government Savings

Household Savings

Corporate Savings

B Income Inequality in China

(Gini Index)Percent

45

40

35

30

25

20

15

10

5

01980 1985 1990 1995 2000

Rural

Urban

National


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repressed. As a result, big companies and rich people are receiving subsidies

from the depositors who have no access to bank credit services and are rela-

tively poor. The concentration of profits and wealth in large companies and the

widening of income disparities are unavoidable. Low royalty levies on natural

resources and monopoly in the service sector have similar effects.

Therefore, it is imperative for China to address structural imbalances, by

removing the remaining distortions in the finance, natural resources, and ser-

vice sectors so as to complete the transition to a well-functioning market econ-

omy. The necessary reforms include (1) removing financial repression and

allowing the development of small local financing institutions including local

banks to increase financial services, especially access to credit, to householdfarms as well as small- and medium-size enterprises in manufacturing and

service sectors; (2) reforming the pension system, removing the old retired

workers pension burden from the state-owned mining companies and levying

appropriate royalty taxes on natural resources; and (3) encouraging entry and

competition in telecommunications, power, and financial sectors.

In recent debates about the rebalancing toward domestic demand in China,

much is made of the need for social safety nets to stimulate domestic demand. I

would argue that a social safety net is needed for social harmony rather than forincreasing the ratio of consumption in China. This is because, while households

may increase the propensity for consumption with improved social safety nets,

the government needs to increase savings in order to accumulate the provision

funds for covering pension and other social program costs. As a result, the total

aggregate savings of private households and the government may not change

much.7The reforms in social safety nets are desirable mainly for protecting the

vulnerable and for providing transitory support to relieve temporary shocks to

jobs and health and to maintain social harmony. The reforms can be based onlessons from international experience from both developed and developing

countries. Note that there have been mixed results from pension privatization

reforms, despite the need for a fiscally sustainable old-age security system. The

question of full funding can be addressed separately from the question of who

manages the savings, and a multipolar design is generally recommended.8In

other social programs, the lessons from the experience of conditional cash

transfers are quite positive, and this is something that China could explore.

9

The Environment: Rebalancing Short-Term Growth and Long-Term Sustainability

Pollution and global warming are real challenges for long-term sustainability.

China is a continental economy, and as a result, environmental externalities

from economic activity are internalized within Chinas borders. This implies


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that there are direct impacts of pollution on the health of the population. Another

challenge is that China is still in the high-carbon phase of development. These

challenges for sustainable growth create the opportunity for China to become

a technological leader in green growth. Theory and experience has shown that

innovation in this area can have important positive spillover effects for techno-

logical upgrading more broadly in the economy as well.

I should note that the reforms I have discussed are the main items in the

Twelfth Five-Year Plan which covers 201115.

5. China and the Multipolar Growth World

It is important to place this moment in history in a broader historical context.After the Industrial Revolution, the world was polarized. Growth in industri-

alized countries accelerated. Later in the 20th century, a few developing econ-

omies in East Asia were able to accelerate growth, and they caught up with

the industrialized countries. Most other developing countries failed to have sus-

tained and accelerated growth. As a result, there is a great divergence between

the developed and developing countries, as Figure 8 shows.

F I G U R E 8History of Economic Growth

30,000

25,000

20,000

15,000

10,000

5,000

0

1990 Int. $

1000 1500 1600 1700 1820 1870 1913 1950 1973 20011

Western Europe

Western Offshoot

Eastern Europe

Former USSRLatin America

Japan

Asia excl. Japan

Africa

Note:In 1990 International Geary-Khamis dollars.

Source:Based on Maddison dataset.


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F I G U R E 9Global Shares of Gross National Income

Source:Authors calculations based on World Development Indicators.

A Share of Global GNI (USD)

Percent

70

60

50

40

30

20

10

01980 1990 2000

G7 Other Other G20

B Share of Global GNI (PPP)

Percent

70

60

50

40

30

20

10

01980 1990 2000

G7 Other Other G20

Given this history, the global economy was dominated by the G-7 econo-

mies consistently throughout the latter half of the 20th century. At market

exchange rates, the G-7 represented about two-thirds of the global economy.

Even accounting for purchasing power parity, half of global income was concen-

trated in the G-7, as displayed in Figure 9.

With the rapid growth in the past 20 years, China has become a major driv-

ing force for the emergence of a multipolar growth world. As shown in Figure

10, in the 1980s and the 1990s, except for China, the other top five contributors to

the growth of global GDP were all members of the G-7 industrialized countries,

and Chinas contributions were respectively 13.4 percent and 26.7 percent of the

contributions of the United States in those two decades. However, in the decadebeginning in 2000, China became the top contributor to the growth of global

GDP. Among the G-7 countries only the United States and Japan remained in

the top-five list, and Chinas contribution exceeded that of the United States by

4 percentage points. A multipolar growth world emerged in the 21st century,

with many of the new growth poles in emerging market economies.

Leading up to the global crisis, a burst of convergence occurred, as develop-

ing countries grew substantially faster than the high-income countries. As we

can see in Figure 11, this superior growth was widespread in developing coun-tries across regions. This tendency is likely to continue as growth prospects

in developing countries remain favorable and prospects for high-income coun-

tries remain subdued. This is not to say that the latter will not affect the former,

but there is sufficient momentum in developing countries own demandcom-

bined with increasing south-to-south economic linkagesthat should sustain

a gap in growth rates between the developing and the high-income countries.


14/17


F I G U R E 1 0Top Five Contributors to Growth By Decade

A 198090

Percent35

30

25

20

15

10

5

0

ChinaUKGermanyJapanUS

B 19902000Percent

40

35

30

25

20

15

10

5

0UKGermanyJapanChinaUS

C 200010Percent

25

20

15

10

5

0BrazilJapanIndiaUSChina

Source:Authors calculations based on data from the WDI.

Fortunately this convergence has also been fairly broad-based across regions

of the developing world.

As a result of this superior growth in the developing world, we have wit-

nessed a shift toward a more multipolar growth world. Figure 12 shows thisshift in economic weight from the G-7 economies to the developing economies

both the larger members of the G-20 and other countries beyond the G-20.

As discussed in Section 3, China has the potential of maintaining an 8 per-

cent annual growth rate for another two decades. If China can maintain this

growth rate in the coming years, it may contribute to the multipolar growth

world in many other ways in addition to GDP growth and trade.

There will be benefits shared and opportunities created by Chinas growthfor both high-income and developing countries. For high-income countries, Chi-

nas growth will expand the markets for capital goods and intermediate goods

exports.

Many developing countries are still major producers of agricultural and

natural resource commodities. Chinese consumption and production growth


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F I G U R E 1 1Growth Acceleration in Developing Countries

(average for 200008)


10

9

8

7

6

5

4

3

2

1

0

Percent

DevelopingCountries

East Asia& Pacific

SouthAsia

Europe &Central Asia

Sub-SaharanAfrica

Middle East &North Africa

Latin America& Caribbean

Additional Growth in Developing Countries

High-Income Countries Average Growth

will continue to support adequate prices for commodities and thus help theseexporters.

In addition, the Chinese government and Chinese firms will also provide

funds for natural resource and infrastructure investment in emerging markets

and low-income countries. This is already happening, and it is likely to con-

tinue into the future. In particular, there is a growing role for Chinese finance

in the African regionthe developing region with the most constrained access

to finance (Wang 2009).

The continued structural transformation of the Chinese economy will cre-ate other opportunities. As China undergoes industrial upgrading to more

sophisticated product markets, it will leave the market space for other develop-

ing countries to enter the more labor-intensive industries. Chinese enterprises

are expected to relocate their existing production to other lower-wage countries

as they upgrade to higher value-added industries, like Japan and East Asian

economies did a few decades ago. The difference is that, because of its size,

China may become a leading dragon for other developing countries instead ofa lead goose in the traditional flying geese pattern of the international diffu-

sion of industrial development.10

China also has an important and expanding role in the new global economic

architecture. As the economic landscape changes to a multipolar growth world,

the international architecture will reorganize, as evidenced by the shift from


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F I G U R E 1 2Rebalancing of the Global Economic Landscape

Sources:Authors calculations based on World Development Indicators.

A Share of Global GNI (USD)

Percent70

60

50

40

30

20

10

01980 1990 2000 2008

G7 Other Other G20

B Share of Global GNI (PPP)

Percent70

60

50

40

30

20

10

01980 1990 2000 2008

G7 Other Other G20

the old G-7 to the broader G-20. China has become a key member in regional

and international forums, such as APEC and the G-20. Over time, there is also

the possibility of the gradual emergence of the Chinese renminbi as a global

reserve currency. This is something that would require many fundamen-

tal reforms in the Chinese economy; however, it is almost inevitable given the

growing relative strength of China in the multipolar world.Whether we are on the verge of an Asian century or not, one thing is clear:

There has already been a dramatic shift in the geographic center of the global

economy. China is very much at the center of this transformation, and its role

as a leading dragon can be beneficial for growth prospects for the overall econ-

omy. The world is desperately in need of engines of growth right now, and fortu-

natelywith continued strong and pragmatic economic policymakingChina

can provide that impetus for economic growth.

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NOTES

1Chang (2001) was one representation of such views.

2PPP data do not go back to 1979 in the World Development Indicator database.

3For further discussion of these two points, see Lin (2012).

4Lin (forthcoming).

5The national data used in this and next paragraphs are taken from Maddison (2010).

6Historical data from World Development Indicators. The forecast for 2011 is from a pre-

liminary World Bank projection.

7An example of this phenomenon is Singapore, which has one of the best social safety nets in

the world, but its savings as a percentage of GDP have been as high as 40 percent.

8See Holzmann and Hinz (2005).

9Conditional cash transfers form one of the most carefully analyzed public policy programs

in developing countries, with numerous impact evaluations completed. For a survey, see

Fiszbein and Schady (2009).

10For the flying geese pattern of industrial diffusion, see Akamatsu (1962).

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